Taking a closer look
Fundamental review of the trading book:
Program issues and impacts
The fundamental review of the trading book (FRTB) goes live in 2019. Its impact stretches far beyond changes to model methodology. National supervisors are expected to finalize implementation of the revised market risk standard by January 2019 and to require their banks to report under the new standards by 2020.
FRTB program implications
While it is reasonably clear what is required for IT, data, and implementation, there are still some unknowns and some tough to deliver requirements, including Non-Modellable Risk Factors (NMRFs), Profit and Loss (P&L) attribution, and the question of whether full revaluation is needed to satisfy the attribution tests.
Although banks have participated in regulatory Quantitative Impact Studies (QIS) and industry surveys, not all banks have performed detailed analysis to determine impact on trading desks and business strategy. By doing so, there is an opportunity to shape the design and implementation of FRTB in a more optimal way.
With major framework changes, such as enhanced disclosure, and increased requirements for Risk-Finance alignment, framework challenges posed by the FRTB should be given early consideration.
Delivering the FRTB
A number of UK and European banks now have programs up and running, or preparing to formally launch, with a view to completing most changes and preparing for parallel run by the end of 2017 or the first part of 2018.
Different banks have focused initially, to varying degrees, on each of QIS and impact assessments, understanding the rules and engaging in lobbying and industry forums, and using FRTB to motivate major system infrastructure changes.
What our experts say
South African banks have started to kick off their FRTB programmes and areas outside the Market Risk departments are becoming more aware of the mammoth task that lies ahead – and that the 2020 deadline is suddenly not that far away. With key issues such as internal risk transfers being a key concern in the South African market, regulatory clarity will be key. Banks who use the changes required by FRTB to also address existing issues in terms of legacy systems, data quality, finance and risk processes as well as efficient Front Office structures, will be at a distinct advantage in a post-FRTB world.
Monique de Waal – Senior Manager | Financial Services Advisory